Clearing System for An Electronic-Based Market

ABSTRACT

A system for an electronic-based market is disclosed. The system operates with a model where a trader is designated to enter orders for contracts on behalf of a subscriber. The model uses assets of the subscriber that are placed into an account that is accessible by the electronic market to cover risks associated with trades initiated by the trader. The system includes a plurality of client stations for entering orders into the electronic market by traders and a server to receive the orders and match the orders in accordance with matching criteria. The server maintains for the subscriber and the subscriber&#39;s associated traders a trading account that is accessible by the electronic market. The server also includes offsetting, clearing, default, and margin protocols functions to administer the market. The market uses species contracts that are derived from a contract genus.

BACKGROUND

This invention relates to trading systems.

A traditional futures exchange is a membership structure that allowstrading only through members. Traditional markets have customers,members and clear members. The financial backing of a traditionalexchange is also through members. Members provide capital and when atrade is completed a clearing member will back the trade. Some exchangesonly allow their clearing members to trade. Other exchanges allow anyperson to trade as long as a clearing member backs the person. That is,a clear member can have customers that have accounts with the clearmember. The customer uses the credit of the clear member to trade andthe customer does not have direct access to the market.

SUMMARY

According to an aspect of the present invention, a method of clearingtransactions on an electronic exchange includes performing a fullsettlement run after cessation of trading, automaticallymarking-to-market all open positions and determining marginrequirements.

According to an additional aspect of the present invention, a computerprogram product residing on a computer readable medium for clearingtransactions on an electronic exchange includes instructions for causinga computer to perform a full settlement run after cessation of trading,automatically mark-to-market all open positions and determine marginrequirements for market participants.

According to an additional aspect of the present invention, a system forclearing transactions on an electronic exchange, includes a computersystem that is fed information regarding trades, current prices forproducts traded on the exchange, information regarding margin availablein a trading account and margin requirements for a contract genus. Thesystem also includes a process that executes on the compute system,including a computer program product residing on a computer readablemedium for clearing transactions on the electronic exchange. The productcomprising instructions for causing the computer to perform a fullsettlement run after cessation of trading, automatically mark-to-marketall open positions, and determine margin requirements for marketparticipants.

One or more of the following advantages may be provided by one or moreaspects of the invention.

Aspects of the invention are directed to clearing transactions inelectronic markets that trade contracts to buy and sell goods. Theclearing system minimizes the incidence of credit-induced financiallosses, contains losses once they are identified, and ensures continuousmarket function and financial integrity. The system minimizes thelikelihood that a particular participant will fail to meet itsobligations to the exchange.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a block diagram of an electronic-based futures exchange.

FIG. 2 is a diagram depicting a system architecture for the market ofFIG. 1

FIG. 3 is a diagram depicting a data structure for a trading account.

FIG. 4 is a flow chart depicting an account process flow.

FIG. 5 is a diagram depicting relationship between contract species anda contract genus.

FIG. 6 is a flow chart of a contract authoring process.

FIGS. 7A-7D are diagrams of graphical user interfaces/screens used inthe system of FIG. 1.

FIG. 8 is a flow chart of an order matching process.

FIG. 9 is a flow chart of a multi-species order matching process.

FIG. 9A is a flow chart of a multi-species order offset process.

FIG. 10 is a block diagram of details of a risk management system.

FIG. 11 is a block diagram of details of a clearing system.

FIG. 12 is a flow chart of an asset-based margin protocol.

FIG. 13 is a flow chart of a liquidation process for defaults.

FIGS. 14-16, 17A, 17B are flow charts of exemplary processes used in themarket.

FIG. 18 is a flow chart showing an example of a liquidation process fordefaults.

FIG. 19 is a block diagram that depicts an exemplary system architectureincluding a layered set of network and application-level systems.

DESCRIPTION

Referring to FIG. 1, an electronic market 10 or exchange that tradecontracts to buy and sell goods is shown. One example of the market isembodied as an electronic futures market. However, in addition totraditional futures type trading in commodity futures trading incontract of other products, instruments and services is possible.

The electronic futures market or exchange 10 has three definedrelationships between market participants and the exchange 10. Therelationships are represented as market participants that include asubscriber 12, guarantor 14, and trader 16. The market participantsinteract through a system 11. All three types of market participantshave contractual relationships with the exchange 10 and are screened byan accrediting agency, e.g., the National Futures Association (NFA) fora US-based exchange (or equivalent) for disciplinary and financialsoundness. Subscribers 12 identify one or more guarantors 14 who provideaccess to financial resources used for margin. Subscribers also identifyone or more traders 16 who are eligible to enter orders for thesubscriber's benefit. In some instances the subscriber 12, guarantor 14,and/or trader 16 may be the same entity.

The system 11 will be described in more detail below. Suffice it here tosay that the system 11 includes computer systems 22 and storage devices24 that store trading accounts 18 and the processes 25 used to implementthe electronic futures exchange 10. The system 11 is accessed by theparticipants using the Internet or other protocols, as will be describedbelow.

A subscriber 12 is the economic beneficiary of the trading that occurson its behalf. Subscribers 12 may be natural persons or other legalentities. All subscribers 12 are subject to the provisions of anexchange subscriber agreement. Subscribers 12 identify assets acceptableto the exchange 10 that can be used for margin to support positions. Theexchange 10 maintains at least one trading account 18 for eachsubscriber. The trading account 18 identifies the subscriber's positionsand the assets used to support the positions. Subscribers 12 may havemultiple trading accounts for multiple guarantors (not shown). Examplesof subscribers 12 might include a customer of a futures commoditiesmarket (FCM), a corporation or financial institution, or a commoditypool. Positions held by a subscriber are associated with the exchangesubscriber trading account 18. Each subscriber trading account 18 willalso identify assets that provide margin for the positions held in thataccount. Positions are determined by product species that a trader 16can trade on.

The second entity in the exchange 10 is a guarantor. A guarantormaintains the assets of the subscriber and makes those assets availableto exchange 10. Guarantors 14 are credit-worthy entities. All guarantors14 are subject to provisions of an exchange guarantor Agreement. Theguarantor 14 gives the exchange 10 control over the assets in asubscriber's trading account 18. In particular, exchange 10 has theright to satisfy all margin obligations by contacting the guarantor anddemanding payment. Failure of the guarantor 14 to provide timely paymentwould constitute a default on the part of the subscriber. Guarantors 14can restrict the markets traded by a subscriber. Examples of a guarantormight include an FCM, bank, credit card facility, other financialinstitution, or a large corporation. In some instances the guarantor maybe a subscriber.

A subscriber can maintain the trading account 18 and assets at aregistered FCM, where the subscriber's funds will be segregated inaccordance with CFTC requirements. In this case, the FCM will beconsidered the guarantor of its subscriber's trading account 18. Asubscriber's trading account 18 can be guaranteed by a third-party,credit worthy institution, including a bank, broker dealer, or corporateentity. The guarantee relationship can be documented by a letter ofcredit or comparable agreement that allows the exchange 10 to haverecourse against the guarantor in the event that the subscriber fails toperform its financial responsibilities, including initial margin andvariation margin obligations up to a specified limit.

A self-guaranteeing subscriber is a corporation or other entity that hassufficient credit worthiness to bear the financial obligations oftrading without requiring a third party's guarantee. The exchange 10 orother entity performs financial surveillance of self-guaranteeingsubscribers 12 in order to maintain a high level of confidence and todeter abuse. A class of self-guaranteeing subscriber is the fully paidlong subscriber. This subscriber deposits assets equal to the full-faceamount of its futures positions at an exchange depository. This form ofself-guarantee is available for long market positions.

A third entity in the market is the trader 16. A trader 16 enters orderson behalf of a subscriber 12. Traders 16 are natural persons. Dependingon the subscriber/guarantor relationship, either the subscriber or itsguarantor authorizes a trader 16 to enter orders for a subscriber'strading account 18. Without such authorization, a trader 16 cannot enterorders in the exchange 10. Examples of traders 16 might include thesubscriber, a commodity trading advisor, an FCM order-entry clerk, or anemployee of the subscriber. Several subscribers 12 may authorize thesame trader 16 (e.g., a commodity trading advisor). Also, severaltraders 16 may be authorized for the same subscriber (e.g., employees ofa corporation). Each category of trader 16 will be identified so thatexchange 10 and/or the National Futures Association can perform tradepractice surveillance 19. Traders will have account access privileges, atrading profile, and trading limits 17 that are reflected in the tradingaccount 18.

Referring now to FIG. 2, the exchange 10 uses the market structure 10described above in an Internet-based on-line trading system 11 havingreal-time clearing 30 and risk management 32 functions. Because allthree types of market participants are known to the exchange 10, riskmanagement 32, compliance and functions, 34 of the exchange 10 can beapplied to any or all of the participant types.

The exchange 10 includes a trading system 40 that is accessible throughsecure sessions using Internet protocols. Traders 16 securely access theexchange 10 via web browsers on client systems (not shown).Additionally, non-browser user interface clients (not shown) capable ofcommunicating with the exchange trading system 60 may be used.Generally, subscribers 12 and guarantors 14 will not have access to thetrading system 40 for trading purposes. However, for risk managementpurposes, subscribers 12 and guarantors 14 may authorize system accessto individuals in their control with supervisory responsibilities.

The exchange 10 can permit a single trader 16 to have several sessionsopen at the same time. Once logged on, a trader 16 may enter orders forany trading account 18 for which the trader 16 has permission to trade.In addition to any contract genus trading restrictions imposed on thetrading account 18 by the subscriber or guarantor, additionaltrader-level limits may be preset, including restrictions on the maximumnet long, net short, or quantity per order. These restrictions aresupplemental to other risk management limitations imposed by theexchange risk management system 32 discussed below.

Referring to FIG. 3, a data structure 18′ that represents a tradingaccount 18 which is an internal exchange account is shown. The datastructure 18′ representing the trading account 18 is stored on acomputer readable medium that is accessible by the processes in FIG. 2,as will be described below. A trading account 18 has fields 18 a, 18 bused to identify both positions and assets for a subscriber. Eachtrading account 18 also has fields 18 c, 18 d to associate the account18 with a particular subscriber and guarantor, respectively. All tradingactivity for a subscriber flows through a trading account 18. The riskmanagement system 32 verifies that sufficient assets are associated withthe account to meet margin requirements for each new position. Assetsare associated with a trading account 18 and are used to meet marginrequirements for a subscriber's positions. Assets may be limited tosupport specific exchange 10 product genera or delivery commitments.Thus, the trading account 18 can include fields 18 e that representconstraints on the assets, e.g., dedicated to particular produced generaor delivery commitments. Examples of assets include cash or cashequivalents on deposit with exchange 10, a segregated account held at anFCM, a letter of credit, or other financial institution guarantee. Thetrading account 18 can include constraint fields 18 f to identify theproduct genera that the trader 16 is authorized to trade.

Referring to FIG. 4, an account process flow 80 is shown. A subscribersubmits 82 an application to the exchange 10. The subscriber identifies84 a guarantor and the assets to be held by that guarantor. The exchange10 and/or a regulatory body, e.g., the NFA, reviews 85 the application.If accepted, the exchange 10 establishes 86 a trading account 18 (FIG.3) for the subscriber. The guarantor enters 88 into an agreement withthe exchange 10 that gives the exchange 10 control over the asset(s).The subscriber or guarantor authorizes 90 a trader 16 to enter ordersfor the subscriber and trading begins.

Referring to FIG. 5, contracts 110 for trading on the exchange 10 areshown. Contract markets available to subscribers 12 and their traders 16are described by a contract genus 100. The contract genus 100 identifiesa particular commodity or market type (e.g., contracts on corn, cotton,or natural gas, benzene, and so forth). The contract genus includesglobal parameters 102 that are applicable to all contracts derived fromthe contract genus. Thus, a properly specified contract genusencapsulates information necessary to operate risk management, marketsurveillance, trading, clearing, and delivery functions of the exchange10. A contract genus definition 102 includes all parameters that areuniversally applicable to a contract (e.g., delivery method, underlyingcurrency, price limits, speculative position limits, speculative marginrates and so forth).

Each contract genus also includes one or more contract species 110 a-110n. The contract species 110 a-110 n are the actual contracts traded.Contract species have global parameters 102 inherited from the contractgenus 100 as well as additional parameters 112 a-112 h that are specificto the species. The contract species 110 a-110 n define distinctpositions in the subscriber's trading account 18. Species parameters 112define various contract species that can be traded (e.g., contractmonth, degree-day base-city).

Some global parameters are inherited by each contract species but can bechanged for each species individually. Examples of customized globalparameters 104 include price limits, speculative position limits,speculative margin rates and so forth.

For example, exchange 10 can list a benzene futures genus. The exchangecan define genus and species parameters to provide a market for thegenus. To produce a contract for benzene, the exchange 10 provides threespecies parameters whose values are specified at order entry time (seeTABLE 1 below):

TABLE 1 PRODUCT GENUS: BENZENE* Type Parameter Possible Values DefaultValue Applies universally Delivery Method Physical N/A to all contractspecies Base Currency USD N/A Exchange can define Position Limit5,000,000 gals 5,000,000 gals separately for each contract species DailyPrice Limit $0.20 per gal $0.20 per gal Trader Selectable Grade astm2359 astm 2359 Trader selects at astm 2359 It order entry time to astm4734 define particular astm zero d contract to be traded DeliveryLocation Houston Houston Corpus Christi Delivery Month June 2000 July2000 July 2000 August 2000

Contract Species permit listing of multi-parameter flexible contractsthat can reflect particularized requirements of each market and marketconstituency. The exchange 10 includes a matching and clearing engine(described below) that permits matching of numerous types of ordersacross species to mitigate any reduced liquidity that comes from greatercontract customization. Multi-parameter contracts can provide benefitsincluding reduced basis risk, increased hedge efficiency, pricediscovery, and risk management even in low-volume markets.

Permission to trade a particular contract genus is enforced by theexchange risk management system 32. As mentioned, a guarantor 14 canrestrict a particular subscriber 12 to trade only select contractgenera, and subscribers 12 may further restrict contract generaavailable to traders 16.

Referring to FIG. 6, a contract authoring process 120 produces contractspecies from a contract genus. The contract authoring process 120 isused to produce new contracts that can be traded. A user decides on 122a product genus and decides on 124 the listing rules for the productgenus. The user decides 126 on species parameters that are associatedwith the product genus. The process 120 can use a wizard technique,e.g., a series of dialog boxes or windows with controls to specify andselect parameters. After a contract genus 122 has been defined, theparticular items necessary to enable the trading of various contractspecies are enumerated. For example, the ‘contract month’ parametermight be enumerated as (June 2000, September 2000, December 2000, andMarch 2001), while the ‘degree day base city’ parameter is enumerated as(Atlanta, Chicago, New York). Species parameters for a product are givenin Table 1. Orders can be entered for any of the above species.

In one embodiment the contract authoring process 120 is used by theexchange 10 to produce contact genera and associated species.Alternatively, certain business-to-business exchanges can use thecontract authoring process 120 to author their own contracts within theparameters of the exchange and any government regulation. One advantageis that the business-to-business exchanges might possess betterknowledge concerning trading practices involved in the tradingparticular products in the business-to-business exchange. This level ofcustomization can make the contracts more tradable and desirable than anexchange employee authoring all the contracts.

Referring to FIGS. 7A-7D, user interface screens, e.g., web pages areshown. FIG. 7A shows a user interface 140 to enter new orders into thesystem 10 is shown. The user interface 140 is implemented as a HTML orequivalent web page and includes fields for specifying an order type142, i.e., buy or sell as well as order terms 144 such as delivery,location, quantity, price, product, product species, delivery month,freight terms and units. The price can be specified in a number of wayssuch as a value, e.g., number; a contract (market price) or a contractmarket price plus or minus a value, e.g., a relative price. In addition,there is a comment field that can be used to enter restrictions orqualifiers on the order. The system can also generate an orderconfirmation page as shown in FIG. 7B. Other screens include a web pagethat depicts the order book for a product, (FIG. 7C) as well as a pagethat depicts product specifications (FIG. 7D).

Referring to FIG. 8, the exchange 10 includes a matching engine 150 thatworks with the order types and qualifiers, as shown in TABLE 2 below.The matching engine 150 receives 152 an order and attempts to match 154the received order with orders on the opposite side of the market thatare queued within an order book 155 in the system in accordance with apriority as set forth below. If the system can form a match 156, thematch is returned 158. Otherwise, if the system cannot form a match, thesystem determines 160 whether there are more potentially matchableorders on the opposite side of the market that can be matched to thereceived order. If there are additional orders, the process will fetch162 the next order. Otherwise, the process will store 164 the order inthe order book in a priority, as specified below.

TABLE 2 ORDER TYPES AND QUALIFIERS Qualifier Types Description MarketBUY Indicates the intention to initiate a purchase or offset a shortposition. Direction SELL Indicates the intention to initiate a sale oroffset a long position. Quantity Value Indicates the quantity topurchase or sell. Subject to other qualifiers, any unsatisfied quantityremains in the order book to be matched by an opposing order. PriceLIMIT Limits the order to be filled at a given price or better. MARKETQuantity to be filled should be filled at any available price. Ifsufficient opposing quantity is available in the order book at time ofentry, the order is filled on the available quantity with any balanceCANCELLED. Trigger Not System immediately attempts to find an opposingorder which satisfies the order Action Specified specification. STOPSystems delays finding an opposing order until the market trades at theactivation price. Requires both a LIMIT parameter and activation priceparameter. Duration Not Order is retained until the end of day asdefined for the contract genus. Specified FILL or Order is not retainedin the order book. KILL GOOD Order is retained until the time indicated.UNTIL GTC Order is retained until its full quantity is filled. StatusNot Order is active in the order book. Specified FILLED Order has beensatisfied. CANCEL Order is removed from the order book SYSTEM The orderremains in the order book, but cannot be matched pending further systemHOLD action. Used typically for risk management purposes. Special HIT ORImmediately enters an order to purchase (TAKE) or sell (HIT) all thequantity Qualifiers TAKE presented as the best-available price. Theorder is CANCELLED for all unsatisfied quantity if the previous bid oroffer price is no longer available at execution time. ALL or Ifinsufficient opposing quantity is available in the order book at time ofentry, the NONE order is immediately CANCELLED by the system. ONE Linksseveral orders together so that the partial or complete satisfaction ofany CANCELS order immediately CANCELS the linked orders. OTHER

Referring now to FIG. 9, the matching process 154 determines 154 awhether the received order and an order are at the opposite side of themarket fetched from the order book have the same level of specificity.If the orders have the same level of specificity 154 b, the orders arepassed to a conventional matching process 154 c to match the order inaccordance with price time priority as would be currently performed on atypical futures market exchange. However, if the process 154 determines154 a that the received order is more generic than the order from theorder book 154 d, and further determines 154 e that the received orderis enabled for more specific matching, then the received order will besent to the matching process 154 c to match positions with the orderfrom the order book. If orders match 154 f, the positions are recordedin each trading account 18 with the degree of specificity on the orderthat was in the order book and the match is returned 154 g. If theorders do not match, the received order will be tested 154 f againstother orders in the order book as above. If the orders in the order bookdo not match the received order, the received order will be placed inthe order book, as described above, in accordance with time pricepriority considerations described below.

If the process determines 154 a that the received order is more specific(e.g., the order book order is more generic) than the queued order inthe order book, the process will determine 154 h whether the queuedorder is enabled 154 i for more specific matching. If the queued orderis enabled for more specific matching the orders are sent to thematching engine 154 c. If there is a match, the positions are recordedin each trading account 18 associated with the orders, with the degreeof specificity as set forth on the received order. Otherwise, if thereare no orders that match the received order, the received order isplaced in the order book.

Each contract genus can use either a price-time or pro-rataorder-matching algorithm to find matching, offsetting orders. Trades areexecuted at the best available price. If there are multiple orders atthe same price, the earlier-posted order has priority. Orders areentered into a contract genus order book. If the order contains all theelements necessary to completely define a contract species then it is acandidate for matching with an offsetting order at the other side of themarket. For example, a trader 16 can place an order for benzene futuresas specified in the example in above. If the trader 16 places the orderto include all of the Grade (e.g., astm 2359), Delivery Location (e.g.,Houston), and Delivery Month (e.g., July 2000) parameters it would beconsidered fully specified. Such an order could be matched against anoffsetting order that referred to the same set of fully specifiedparameters. Orders matched in this manner are analogous to theprocedures used in conventional futures order matching.

TABLE 3 MULTI-SPECIES ORDER MATCHING RULES Activating Resting Order is:Order is: Resulting Match and System Behavior Same Same The orders arematched. Each position is Specificity Specificity recorded in eachtrading account 18 with the degree of specificity on both orders. MoreMore Specific If the activating order is more generic and Genericenabled for ‘more specific matching’, then orders are matched andpositions recorded in each trading account 18 with the degree ofspecificity on the resting order: otherwise activating orders are placedin the order book. More More Generic If the resting order more genericand enabled Specific for ‘more specific matching’, the orders arematched and positions recorded in each trading account 18 with thedegree of specificity on the activating order; otherwise activatingorders are placed in the order book.

In addition to single contract species matching, the matching algorithmsupports matching orders across contract species. Multi-species ordermatching rules are shown in TABLE 3. Such an order can be entered intothe contract genus order book, without all the elements necessary tocompletely define a contract species. Again, consider that a trader 16can place an order for Benzene as specified above. If the trader 16places the order to include the Grade (e.g., astm 2359) and DeliveryMonth (e.g., July 2000) parameters, but indicates the Delivery Locationas ANY, it would NOT be considered fully specified. This order could bematched against an offsetting order that also contained ANY as theDelivery location parameter.

The exchange 10 allows a trader 16 to specify that an order be matchedagainst more specific orders. In the example considered here, either theHouston or Corpus Christi delivery points, if specified on thecontra-order, could be deemed acceptable matches. Multiple and crosscontract species matching impacts position offset rules. If a tradingaccount 18 has both specified and unspecified positions in it, positionoffset will depend on whether the long or short is more highlyspecified, and whether the long or short determines actual deliveryterms.

Referring now to FIG. 9A, a position offsetting process 180 is shown. Inthis example, the process 18 assumes that the short interests setsunspecified contract terms at the time of contract delivery. Theposition offsetting process 180 is used to offset positions from acommon trader 16 or a common subscriber in a common market. The positionoffsetting process 180 determines 182 whether the subscriber has a longposition and a short position in the market. The process also determines184 the relative specificity of the positions. If a long position in amarket has the same specificity 186 as a short position in the market,and if so, the positions are set 186 to offset and the offsettingpositions are recorded 188 in the trading account 18 of the trader 16.If the long position is more generic than the short position 190, thepositions will not offset since the exchange cannot determine that theremaining positions will result in a correct match between short andlong positions at delivery time. However, if the long position is morespecific 192 than the short position, the positions will offset upontrader instruction 194 since the exchange 10 can be certain that theremaining positions will result in a correct match between short andlong positions at delivery time. TABLE 4 shows offset rules.

TABLE 4 MULTI-SPECIES POSITION OFFSET RULES* Long Position Short is:Position is: Resulting Offset Same Same Positions offset. SpecificitySpecificity More More No offset. Exchange 10 cannot be certain thatGeneric Specific the remaining positions will result in a correct matchbetween short and long at delivery time. More More Positions offset upontrader instruction. Specific Generic Exchange 10 can be certain that theremaining positions will result in a correct match between short andlong at delivery time.

The Exchange 10 can permit certain trades to be matched away from theexchange 10 order book. In particular EFPs, Block Trades, and otheradjustments can be posted to the exchange clearing system withoutpassing through the exchange's matching engine. Exchange of futures forphysicals (EFPs) and block trades are particular trades that can be doneoutside of the trade matching system, but which are entered into thetrading system after they take place. Both parties to the trade reportan EFP or block trade to the exchange 10 so that open interest andposition information can be updated accordingly. The exchange 10verifies that sufficient assets are available in each subscriber'strading account 18 before allowing the trade to be cleared.

An ex-pit is a notification of a change to an already cleared trade.Changes may include the subscriber to whom the trade was attributed; theprice at which the trade was executed; or the quantity traded. Bothsides of the original trade need to agree to price and quantity changes.EFPs, ex-pits and block trades are recorded as special trade types.Ex-pits transactions generally are not broadcast to the entire market.The exchange compliance system monitors these trades to ensure that theycomply with exchange rules.

Confirmation messages are generated upon order entry and execution. TheExchange 10 can electronically deliver messages via, E-mail, fax,beeper, personal assistant, etc. The messages are sent to the executingtrader 16 and to the subscriber for whom the order was placed. Messagesmay be sent to the guarantor or others upon request.

Orders may be modified prior to being matched. If an order is modified,it loses its position in the order book unless the modification is tolower the order quantity. Orders may be canceled for any unsatisfiedportion before being matched. In certain risk management circumstances,exchange 10 can suspend an order by indicating the order as System Held.Suspended orders remain in the order book, but they are not availablefor matching. If a held order is reactivated, it retains its originaltime priority.

Referring to FIG. 10, the exchange 10 includes a risk management system32 to minimize the incidence of credit-induced financial losses, containlosses once they are identified, and ensure continuous market functionand financial integrity. The risk management system 32 minimizes thelikelihood that a particular subscriber will fail to meet itsobligations to the exchange 10. The risk management system 32 includes asystem-enforced position and trading limits process 220 that covers alltraders 16 acting on behalf of a subscriber. These limits can be set bythe subscriber, the guarantor, or by the exchange 10. The integratedrisk management also includes system-enforced position and tradinglimits process 222 that covers all subscribers 12 and may be triggeredby monetary deficiencies, 222 a positions at or above the limits set forthat entity, 222 b or other conditions 222 c. In addition, the riskmanagement system includes a real time or near-real-time credit checkingprocess 224 that checks subscriber positions and available assets. Thecredit checking process 224 verifies credit, positions and availableassets at order entry, upon significant market movements, and at the endof every trading day.

The exchange 10 measures risk in a number of ways. Thresholds forvarious risk parameters are set 226 for each trader 16 and eachsubscriber. There are default thresholds that may be changed for eachand every entity at the discretion of the exchange 10. Thresholdsinclude total positions, net positions, total dollar holdings, marketconcentrations, and asset value changes. Risk fluctuates several waysfor a given trading account. For example, positions held in the accountmay change in value, the assets held in the account may change in value,and the exchange 10 may increase margin rates, which will requireadditional funds to be deposited.

To minimize large fluctuations in parameters, and thus large movementsin risk, the exchange 10 measures each of these conditions independentlyat regular intervals (e.g., daily, hourly, upon limit price move, etc.).The risk system 32 revalues 228 assets on account, marks-to-market thepositions 230 in each trading account, determines 232 the profit andloss of current trading, and recalculates 234 the margin requirement ofthe subscriber's portfolio. A comparison 236 is made of the asset valuein the account versus the required margin, and, when a deficiency occurs238, the exchange 10 requires additional assets of the subscribers 12.To limit the losses that arise from the inability of a subscriber toperform (e.g., pay for trades, cover margin deficiencies, or deliverydefault), exchange 10 can establish an initial margin, e.g., at leasttwice the daily limit move permitted for each contract species.

Asset valuation also includes a capital charge process 236 that reflectsboth the cost of liquidating the asset, and the possible value changessuch assets may incur before they can be sold. When a deficiency isnoted in an account (i.e., required margin exceeds asset value), thesubscriber will be asked to increase the asset value in the account.

Referring to FIG. 11, the exchange 10 clears and settles everytransaction and serves as the counterpart to every trade. The exchangeclearing and settlement system 30 is a fully integrated processingengine for exchange clearing and settlement functions. The exchange 10uses different margin protocols 32 a. For example, a conventionalcash-based margin protocol can be used. The exchange 10 can also use anAsset-based protocol, as discussed below. The protocol used isdetermined by the contract genus. The Asset-based Margin Protocol (AMP)replaces daily pays and collects of margin that occurs with thecash-based protocol, with asset verification at the subscriber andguarantor levels. The Asset-based Margin Protocol can reduce the costsof participating in futures markets without compromising riskmanagement.

The clearing system 30 includes a settlement engine 30 b that performs afull settlement run 250 daily, after cessation of trading. The clearingsystem 30 also includes an engine 30 c to determine positions of allsubscribers on a periodic basis as well as those of subscribers duringtrade clearing. The clearing function also includes an assetvaluation/deposit engine 30 d that updates asset values in relationcurrent market conditions for use with margin requirements and managesdeposit and withdrawals of assets.

Exchange clearing and settlement systems 30 provide constant, real-timegross and net financial data. The exchange 10 system automaticallymarks-to-market all open positions. The clearing system 30 determinesmargin. With a cash margin protocol, at the end of every day, the systemsends to subscribers 12, their depository or guaranteeing banks, as thecase may be, and/or to their FCMs their debits and/or credits, and theresulting balances in, each subscriber's account. In the CMP, positioninformation is disseminated and each subscriber or its guarantor willmake or receive daily pays or collects. These transfers will take placethrough the exchange depository bank. In the AMP, position informationwill be disseminated, but no daily pays or collects will take place solong as sufficient assets are already identified. Subscribers 12 ortheir guarantor will be required to make payment or provide evidence ofadditional assets when a subscriber needs to meet new marginobligations.

As soon as any portion of an order is filled, the position for thatsubscriber is posted to the trading account 18 indicated by the trader16 on the order. When the contract species can result in an offset, thetrade is liquidated with any resulting credit or debit identified as arealized gain or loss in the subscriber's trading account. In additionto trade posting, positions may be altered by making or taking deliveryof the underlying product, accepting cash delivery for the position, orexecuting an exchange-for-physical against the position. Thesealterations will trigger position adjustments and are treated by theclearing system 30 as though the trades were matched through theexchange matching engine.

Assets may be placed in or released from a subscriber's trading account18 at any time provide that a release will not bring assets below arequired margin amount. Assets will be recorded in face amounts (whenappropriate), and in equivalent value to reflect the capital chargeapplied to each asset. An asset inventory will be maintained for eachtrading account. Assets may be limited to covering a single contractgenus or a specific delivery commitment, or may be applied acrossmultiple products. When determining a subscriber's excess or deficiency,more restricted assets will be applied first against their allowablecontract genus, and then less restricted assets will be applied.

An initial margin can be set at a minimum of two times the daily pricelimit move for each contract species held in a subscriber's tradingaccount 18. A variation margin will be calculated at least daily andapplied to the subscriber's trading account. For contract genera thatemploy the Asset-based Margin Protocol, the margin maintenance is set at100% of the initial margin rate as sufficient assets must always beavailable. Contract genera that employ the CMP will have maintenancemargin levels set at 75% of initial margin rates.

Referring to FIG. 12, an asset-based margin protocol process 300 isshown. A trader 16 takes 302 a position in a contact. If the contractgenus is defined as clearing through the asset-based margin protocol304, any profits that accrue while the position is still open are postedas assets in the trading account 18 as an unrealized gain. Theunrealized gain can be used to trade with. The profit is obtained whenthe position is closed out, or at contract termination. As long as thecontract position is open, the trading account 18 is debited with lossesor credited with gains 308. The asset-based margin protocol differs fromthe typical futures market, which uses a cash-based margin protocol. Ina cash-based margin protocol money moves from account to account amongfinancial institutions.

At any time during the day or at least twice a day, there is a mark tomarket done 310 against a position. With an asset-based protocol thesubscriber determines 312 if there is an unrealized gain or a loss. Withasset-based margin protocol, the system does not make routine daily paysand collects. Rather, the system accrues 316 net unrealized lossesagainst a subscriber's assets or credits unrealized gains 316. Theexchange 10 can make on-demand requests for cash payment of either orboth initial margin and unrealized losses (i.e., accrued variationmargin) against the subscriber's assets at any time. The system willalso make demand payments for realized losses at time of positionoffset, and permit a subscriber to use net unrealized gains to reduce orwithdraw other assets in the trading account. The system will makepayments for realized gains at time of position offset, but suchpayments are only guaranteed at time of contract expiration.

For example, XYZ Corp., a mid-size corporation, wishes to hedge usingexchange 10 benzene futures. The company has secured a letter of credit(“LC”) from its bank for the benefit of exchange 10 that entitles XYZ tomaintain a position of up to $100,000 in benzene futures. At an initialmargin rate of $0.40 per gallon, this credit amount translates to amaximum initial position of 250,000 gallons. The trader 16 for XYZ Corp.purchases futures on 100,000 gallons of benzene at a price of $2.00 pergallon. Exchange 10 notes in XYZ's trading account 18 that $40,000 fromXYZ's letter of credit is allocated to initial margin. With theasset-based margin protocol, exchange 10 does not draw upon the letterof credit. Subsequently, the trader 16 exits the position at $1.90.Exchange 10 advises XYZ that the unrealized loss of $10,000 is due andpayable and notes in the XYZ trading account 18 that $30,000 of theletter of credit is again available. Upon receipt of $10,000, the fullvalue of the LC is available to XYZ Corp.

ABC Corp., another mid-size corporation, also wishes to hedge usingexchange 10 benzene futures. The company has deposited $50,000 cash withexchange 10. At an initial margin rate of $0.40 per gallon, thistranslates to a maximum initial position of 125,000 gallons. The trader16 for ABC Corp. purchases futures on 125,000 gallons of benzene at aprice of $1.50 per gallon. Exchange 10 notes in ABC's trading account 18that $40,000 is allocated to initial margin. Subsequently, the marketrises to $1.70. ABC's unrealized gain now equals $20,000. Exchange 10will advise ABC that it may now withdraw up to $20,000 from the ABCtrading account, which is equal to the $20,000 unrealized gain now inthat account.

AMP differs from the Cash-based Margin Protocol (CMP) in that daily paysand collects of margin differences are not made. Instead, subscriberassets provided through the subscriber's guarantor are made available tothe exchange 10 on demand. All other components of the exchange 10,e.g., risk management system and clearing systems are identical for bothmargin protocols. The exchange 10 provides direct access to subscribers12. The Asset-based Margin Protocol (AMP) eliminates cumbersome dailypay and collect procedures that would occur in a cash-based marginprotocol.

Exchange 10 performs an end of day settlement run for each contractmarket. Positions are marked to market, trading profit and loss arecomputed, and total profit and loss amounts are determined for eachtrading account. These amounts are added to (in the case of profits), orsubtracted from (in the case of losses), the asset value in the tradingaccount 18. This process will precede margin calculations so that thetrue asset value, including accumulated profit and loss, can be used tocompare against requirements to establish an excess/deficit indication.

At any time during the day, a profit-and-loss computation can beperformed. It can be applied to an individual contract genus, to allcontract genera, or just selected subscribers 12. Similarly, it can beapplied to any or all trading accounts. Anytime a settlement isperformed the trading accounts are updated with the results and thesystem marks the event. Subsequent settlements are performed by markingto market from the previous mark to the present. When a trade is made,if it is on the same side of the market as an existing position in thetrading account, or if there was no pre-existing position, it considerednew business and open interest increases by the trade quantity. If inthe trading account 18 position already exists on the opposite side ofthe market, the position is reduced. If the trade quantity is largerthan the existing position, the position will switch sides of the marketwith the resulting position equal to the difference between theoriginally existing position and the trade quantity. At the close oftrading on the last trading day, a full pay/collect will be performedfor all open positions in the expiring contract. All open accounts willbe closed and balances will be transferred through the exchange 10 tothe bank accounts of the subscribers.

Any trading account 18 having a position at the termination of tradingfor a contract species will be required to make (if short) or accept (iflong) delivery. All positions require that delivery margin requirementsare met by the assets in the trading account 18. The pay and collectprocess will be performed for both cash delivered and physicallydelivered products (see contract termination). For physically deliveredproducts, sellers (deliverers) and buyers (receivers) are matched usingalgorithms specific to the contract genus. The following functions arerecorded by the exchange 10.

The receiver indicates that money has been sent. The deliverer indicatesthat the good have been sent. The deliverer indicates that the money hasbeen received. The receiver indicates that the good have been receivedand are in proper order. When these four items have been completed, thesystem marks the positions as delivered, and releases the deliverymargin.

Defaults

The system 11 handles defaults by a member, e.g., subscriber. Any of thefollowing events can result in a default by a subscriber 12. Forexample, a subscriber 12 can fail to meet any of its obligations underits Contracts with the exchange. Such defaults occur when a subscriber12 holds a short contract position and does not tender a delivery noticeor holds a long contract position and does not accept delivery or doesnot make full payment when due. These are examples of monetary defaults.Other monetary defaults include failing to meet minimum marginobligations and so forth. Other types of default events includecommencing a voluntary or a joint case in bankruptcy or filing avoluntary petition or an answer seeking liquidation, appointment of acustodian, liquidator, conservator, receiver or trustee, making anassignment for the benefit of creditors or becoming or admitting that itis insolvent. In addition, an involuntary case of bankruptcy or aninvoluntary petition would be a defaulting event.

To secure the exchange and its other participating subscribers 12 fromfinancial exposure, the defaulting subscriber 12 is automaticallysuspended. The suspension may be temporarily postponed by an official ofthe exchange, e.g., the President, if the official determines that suchsuspension would not be in the best interests of the exchange.

Referring to FIG. 13, the system 11 includes a liquidation process 340to close out a position upon termination or suspension of a subscriber12. When an entity ceases to be a subscriber 12 or is suspended all opencontracts carried in the system for subscriber 12 are liquidated, as setforth below. The liquidation process 340 occurs as expeditiously aspracticable. There are situations where the default process need not beused since the protection of the exchange does not require theimplementation of the default process 340. For example if open contractsare transferred to and accepted by one or more other subscribers 12,with the consent of the exchange or the official determines that theprotection of the financial integrity of the exchange does not requiresuch a liquidation; or such liquidation is delayed because of thecessation or curtailment of trading on the exchange for such contracts.

The liquidation process 340 determines 342 if it is necessary toliquidate any open Contracts of a subscriber. If necessary, the exchangeproceeds to liquidate the positions of the defaulting subscriber. If theexchange is unable for any reason to liquidate the open contracts in aprompt and orderly fashion, the official of the exchange may authorize344 the executions from time to time for the account of the exchange,solely for the purpose of reducing the risk to the exchange resultingfrom the continued maintenance of such open contracts. The official canhedge transactions, including, without limitation, the purchase, grant,exercise or sale of contracts The defaulting subscriber remains liableto the exchange for any commissions or other expenses incurred inliquidating such contracts. The open contracts are liquidated by placing346 orders for the purchase, grant, exercise, or sale of contractswithin the trading system 11, subject to the rules of the market for thecontract.

The liquidation process 340 includes other techniques to close out thepositions of the defaulting subscriber. The liquidation process 340 canplace 348 spread orders for any combination of contracts other than theliquidation contract within the trading system 11 and subject to therules of the respective contract markets, conduct 350 a uniform secondprice sealed auction to liquidate open contracts. The liquidationprocess can offset 352 such contracts against the opposite side openinterest on a last-in first-out basis at a price equal to the settlementprice on the day such liquidation is ordered or at such other price asthe Board may establish. This offset effects mutualization of risk amongmarket participants in this manner allows for orderly disposition of thedefaulting subscriber's positions and allows the exchange to operatewith minimal capital reserves for handling defaults.

If an order for relief has been entered with respect to the defaultingperson, the exchange will not effect any such liquidation by book entryexcept as may be permitted by governmental regulations. Any liquidationmay be effected without placing orders for execution into the tradingsystem 11, by making appropriate book entries on the records of thecompany (including, without limitation, by pairing and cancelingoffsetting long and short positions). If it is not possible to liquidateall net open contracts the company may liquidate such contracts bytaking opposite positions in the current expiration month for theaccount of the defaulting subscriber 12 and liquidating the resultantoffset positions by a spread. All liquidations are for the account andrisk of the defaulting subscriber.

Payments in the Event of Default

The original margin of the defaulting subscriber 12 and any of its otherassets or credit facilities under the control of the exchange areliquidated and applied by the company to pay the amount owing (the“Defaulted Obligation”). If the margin and other assets or creditfacilities of the defaulting subscriber 12 under the control of thecompany are in the aggregate less than the defaulted obligation, and ifthe defaulting subscriber 12 fails to pay the company the amount of thedeficiency on demand, such defaulting subscriber 12 continues to beliable for the deficiency.

The amount of the deficiency, until collected from the defaultingsubscriber 12, is met from various sources. For example, one set ofsources of funds can be a loan on such terms and conditions as thepresident may determine to be necessary or appropriate; a guaranty fundor insurance proceeds, if any, received by the company in connectionwith the event of default giving rise to the defaulted obligation; and asurplus, if any, of the exchange as the Board determines in accordancewith the Bylaws to be available for such purpose. The sources can be ina listed order with each such source being fully exhausted before thenext following source is applied.

Referring to FIG. 14, an example 400 of the exchange process used insystem 11 is shown. Company Inc. decides 402 to trade safflower andolive oil futures on system 11. Its CEO applies 404 to system 11 tobecome a Subscriber. Company Inc.'s head oil trader, is designated 404by Company Inc., as its authorized trader. System 11 receives 406Company Inc.'s application, which includes its designation of a trader.The names of Company Inc., Subscriber, and Trader are forwarded 408 tothe NFA for a background check by NFA. NFA also verifies that CompanyInc. is an eligible swap participant based on Company Inc.'s financialstatements and databases (e.g., Dun & Bradstreet). With NFA's check andCompany Inc.'s subscriber agreement complete, system 11 produces 412 atrading account 18 for Company Inc. An administrative user ID andpassword are provided 414 to Subscriber. Administrative accounts do nothave trading privileges. A trading account user ID and password areprovided 416 to Trader. Although Company Inc. has a trading account 18at system 11, Trader may not enter trades because the company has notopened an account with a custody bank.

The subscriber selects 418 a custodian bank from a list of approvedfinancial institutions (AFIs). The custodian bank opens 420 a system 11sub-custodial account for the benefit of Company Inc. After receiving asigned account agreement from Company Inc. and verification fromcustodian bank, System 11 internally assigns 422 the Account atcustodian bank to the Company Inc. trading account 18.

Subscriber uses a secure Internet connection to system 11 to authorizeTrader to enter trades for the trading account 18. Although an Tradingaccount 18 has been provided and Trader has been authorized to trade,system 11's trading system prohibits Trader from entering trades becausethe Account has no assets to cover original margin.

As an internal control, Subscriber restricts Company Inc.'s tradingactivity to the safflower and olive oil markets. Furthermore, Subscriberdecides that Trader should be constrained to trading 20 or fewercontracts per day and a position limit of 20 contracts. Subscriber usesthe secure Internet connection to system 11 to establish these controls.

Subscriber deposits 428 assets in the sub-custodial account e.g., sixTreasury bills of $10,000 each and $5,000 in cash in the sub-custodialAccount. Custodian bank notifies 430 system 11, e.g., by fax or othermanner that the six T-Bills and cash have been placed in the Account.The notification includes a description of each asset e.g. face value,CUSIP number, expiration date, issue date, denomination, and so forth.

System 11 records 432 these deposits using a clearing administrativescreen for asset deposits. The records in the system 11 always reflectthe assets in the account as verified by custodian bank in its custodianbank capacity. Subscriber also arranges for an irrevocable Letter ofCredit (L/C) to be provided by Bank for Company Inc.'s positions atsystem 11 in the amount of $50,000. The L/C provides that it can be usedonly to support margin requirements for Company Inc.'s trading insafflower or Olive Oil contracts. Subscriber notifies system 11 of theL/C and stipulates that the L/C is associated with the same Tradingaccount 18 that Company Inc. previously funded at custodian bank so thatthe total amount of Margin Eligible Assets in that trading account 18 is$115,000 ($60,000 T-bills, $5,000 cash, $50,000 L/C). System 11 receivesthe L/C from Bank and adds the L/C amount, less an L/C “haircut”, to theTrading Account “assets” of Company Inc. Trading may now take place.

Referring to FIG. 15, the system 11 will approve Trader's orders subjectto the constraints placed by Subscriber's administrative limits andoriginal margin availability.

Trader places 450 a bid to buy 2 lots of safflower Oil futures for adelivery date of Sep. 29, 2000. The trader is willing to take deliveryat “Any” location and in “Any” container type. The trader is willing topay up to $0.55 per gallon. (Contract specifications are shown in TABLE4 below.) This limit buy order is placed 452 on the order book at system11 and is disseminated 454 to all market participants. The orderdisplays price and quantity.

A second trader (already enabled to trade) places 456 an offer to sell 2lots of Company Inc. oil futures for delivery on Sep. 29, 2000, withadditional parameters of New York delivery in 10-gallon cans. The askingprice is $0.60 per gallon. Because second trader is willing to takedelivery in New York and in 10-gallon containers, the second trader'sbid is also displayed 458 on the order book. This is also a limit order,but on the sell side of the market. All market participants see that themarket for safflower Oil, New York delivery, 10-gallon cans is bid $0.55and offered at $0.60. Company Inc.'s order would appear on any orderbook for Company Inc. oil futures for delivery on Sep. 29, 2000 with amore specific delivery location or container specification.

Trader decides to increase the offer to $0.57. The trader does this bychanging 460 the original offer. System 11 treats price changes as aCancel/Replace so Trader's order now reflects the time priority of a neworder. Because no one else has a limit order in the system 11 at thatside of the market for the same price or better, Trader is still thebest bid. If there were other $0.57 bids entered before Trader's change,Trader would be behind them in the time priority queue. The systemchanges the market to reflect the new bid at 0.57 and the offer at 0.60.At this point the second trader (seller) decides to hit the $0.57 bid.The second trader can enter 466 the trade in a number of ways, e.g., bycancelling and replacing the original order that is either a marketorder or a limit order at $0.57.

Referring to FIG. 16, the system 11 performs 480 margin determinationfor each trader. Company Inc. oil futures have an Original Margin of$1,500. Therefore, two lots will produces an Original Margin requirementof 2 times $1,500, or $3,000. The system indicates 482 that a tradematch at $0.57 is possible. A real-time credit check 484 is performed todetermine whether Company Inc.'s total Original Margin requirementincluding the result of the new trade is less than the Margin ObligationEligible Assets identified in the trading account 18. The check is alsoperformed for the other market participant.

Looking at the funds on deposit for Company Inc.'s Trading account 18,the system notes total T-Bill value of $60,000, a $50,000 L/C and cashof $5,000. Since T-Bills have a haircut of 5%, and L/Cs have a 20%haircut. The clearance system 30 produces a total “operating value” ofassets equal to $57,000 ($60,000 minus 5%), plus $40,000 ($50,000 minus20%) plus $5,000 for a total of $102,000. The Company Inc.'s order iseligible 488 to be matched, since the operating value is greater thanthe Original Margin requirement. Assume for this example that the secondtrader does not have sufficient margin 489.

If the second trader does not have sufficient Margin Obligation EligibleAssets present at its Custody Bank to support the trade, then no tradecan occur between these two parties. The second trader with theinsufficient assets has the order placed 490 on system hold and isnotified 492 electronically of the order status and reason. Tradecompliance staff is also notified of the situation.

Referring back to FIG. 15, another market participant third trader, withsufficient Margin Eligible Assets hits 468 Trader's bid. Both partiesreceive 470 an electronic trade confirmation. Upon match, market data isupdated 472 to reflect the match. The last trade price is updated andcurrent volume count is increased. The match is for the more specificproduct and information regarding that product is updated. Subscribersees the following Trading Account statement:

Cash 5,000.00 5,000.00 Governments 60,000.00 57,000.00 L/C 50,000.0040,000.00 Margin Requirement Company Inc. Oil 2 long @$1,500.00($3,000.00) Less Open Contract Gains $20.00 Net Original MarginRequirement ($2,980.00) Margin Availability $99,020.00The system 11 collects and/or computes the following information fordisplay.

1) Margin Eligible Assets (Cash, Government Securities, Letters ofCredit, Foreign Currencies)

2) Any reduction in the Margin Eligible Assets due to haircuts onGovernment Securities, Letters of Credit, or Foreign Currency amounts.3) Margin requirements (Original, Delivery)4) Gains or losses associated with Open positions reflecting anydifferences between the last mark-to-market and last pay collect.5) Gains or losses from Closed Contract positions.

For mark-to-market the reference price is determined by the system 11and may be the last trade price, a computation derived with bids oroffers, or external reference prices. All accounts are credited ordebited with the amount of the gain or loss. An open contract gain of$20.00 indicates that a mark-to-market occurred since the lastpay/collect cycle and that the mark-to-market was in Company Inc.'sfavor. Had the pay/collect occurred, then Company Inc.'s cash would showa balance of $5,020.00 and the Open Contract Gains would show a balanceof $0. Open Contract Gains may be applied to Margin Availability, butmay not be withdrawn from an account.

Settlement

Referring to FIGS. 17A and 17B, for Company Inc.'s account, thereference price is now $0.55, which produces a loss of 0.02 percontract, or a total loss of $20.00. The Trading account 18 will beposted 502 with an Open Contract loss of $20.00. At midday, the system11 performs a scheduled intra-day mark-to-market 504 using referenceprices for all futures contracts. No pay-collect is scheduled as aroutine part of this mark-to-market, but all account values are updated506. The system 11 performs three different operations during thisprocess. Funds on deposit are revalued 508 (e.g. to reflect changes inthe value of Government securities); positions are revalued 510 usingthe latest reference prices; and the latest Margin levels are applied512 (e.g. there is an intra-day change in margin rates).

End of Day Settlement—Company Inc.'s Trading Account

Company Inc. Oil Settlement Price is $0.50 Loss is 0.05 * 500 gallons *2 lots = $50.00 Subscriber sees the following Trading Account statement:Funds: Face Available for Margin Cash 4,9500.00 4,950.00 Governments60,000.00 57,000.00 L/C 50,000.00 40,000.00 Margin Requirement CompanyInc. Oil 2 long @$1,500.00 ($3,000.00) Less Open Contract Gains $0.00Net Original Margin Requirement ($3,000.00) Margin Availability$98,950.00

Subscriber sees the following Trading Account statement: Funds: FaceAvailable for Margin Cash 5,0000.00 5,000.00 Governments 60,000.0057,000.00 L/C 50,000.00 40,000.00 Margin Requirement Company Inc. Oil 2long @$1,500.00 ($3,000.00) Less Open Contract Loss $50.00 Net OriginalMargin Requirement ($3,050.00) Margin Availability $98,950.00

The safflower oil futures market contract specification calls for dailyvariation margin payment. Therefore, system 11 clearing process 30 willdebit 520 Company Inc.'s Subcustodial account by $50. In the event thatCompany Inc. did not have sufficient assets in the account, the Exchangewould notify 522 subscriber of a payment requirement to be met no laterthan the next morning. Failure to do so would trigger the defaultproceedings described below. System 11 has no maintenance level marginamounts for its customers. All variation margin calls must be metregardless of amount.

In the event that the Company Inc. oil futures contract did not specifydaily variation margin payment, Subscriber's account would bemarked-to-market as in the Intra-day example. The subscriber's OpenContract position would show a loss of $50.00, making a total marginrequirement $3,050.00 and the cash amount would remain $5,000. In eithercase, Margin availability is the same at $98,950.00. Notwithstandingthat variation margin may not be required on a daily cycle, the exchange11 can reserve the right to make a variation margin call (i.e. perform apay collect) on any contract market at any time. Furthermore, thecompany reserves the right to make a variation margin call to any ClassB member at any time.

Contract Specification Category Specification system 11 Company Inc. OilTrading unit 30,000 lbs. Futures Container Railway tank car, 50-gallondrums, 10- gallon cans Price quotation Cents/lb Daily price limit 1 centper pound above or below previous day's settlement price. Minimum pricefluctuation 1/100^(th) cent ($0.0001)/lb Expiration cycle Monthly Lasttrading day Eighth last business day of the contract month. Lastdelivery day Last business day of the month Delivery locations New York,Newark, Los Angeles, Des Moines, Houston, Chicago Trading hours From6:30 p.m. preceding day to 5:30 p.m. Daily settlement time 3:00 p.m.Note: Pro-forma contract and Note: Specifications are flexible. Newspecifications. For example specifications can be added to suit purposesonly. market needs. In addition, when placing an order, a buyer orseller can specify “Any” for specifications that they may be indifferentto.

Assuming that Company Inc. defaults by incurring a defaulting eventdescribed above in conjunction with FIG. 13. For example Company Inc.fails to meet its obligations under its contracts with the system orCompany Inc., has a monetary default. The subscriber's contracts will beliquidated unless there are excess assets sufficient in one or moresubscriber accounts to cover the amount due, or liquidation of one ormore positions will satisfy the subscriber's obligations. In the latertwo cases, the subscriber will remain in default and will be restrictedto trade for liquidation only until a re-application for subscriberstatus is submitted and approved.

A monetary default occurs if Company Inc. holds a short futures contractposition and does not tender a delivery notice on or before the timespecified by the exchange or fails to make delivery by the timespecified by the system or if Company Inc. holds a long futures contractposition and does not accept delivery or does not make full payment whendue as specified by the system 11. A clearinghouse will be in contactwith Company Inc. to determine the reason for the delivery default.Depending on the nature of the delivery default, the exchange and/orclearinghouse may liquidate the position or use the initial and/ordelivery margin to mitigate the situation. In no circumstance does theclearinghouse guarantee that the actual goods specified in the contractare delivered to the long.

If the guarantor fails to timely perform with respect to any demand ofpayment by the exchange system 11 for assets that are in the custodyaccount the guarantor also defaults and the exchange and clearinghousewill revoke its status as an approved financial institution and willseek to recover amounts from the guarantor subject to its agreement withthe clearinghouse.

Referring to FIG. 18, a trader has $6,000 in a custodial account andwishes to get short one Five Year Note Contract. The scenario belowshows how the system clearinghouse would handle a default. The Defaultprocess 530 is designed to eliminate risk to the clearing system bylinking daily price limits to real-time collection of initial margin,which is a function of the daily price limits. Five Year Note Contracthas daily price limit equal to 20 basis points or $2,000 per contract.All system contracts can have daily price limits.

In this example, the initial margin for Five Year Note Contracts is set532 at $6,000. The trader's custodial account has exactly $6,000 so theclearinghouse approves 534 the trade. All contracts will have an initialmargin not less than three times the daily price limit, which equals themaximum loss that could be incurred in two consecutive trading sessions.The prior settlement for Five Year Notes was 92.00. Assume that theday's trading range is 91.80 to 92.20 (20 basis points). The tradersells 536 a contract at 91.80 (limit down) and the market settles at92.20 (limit up). The maximum loss a trader could experience on thefirst trading day equals twice the daily price limit (e.g. a sale at91.80 with a close at 92.20 or a purchase at 92.20 and a close at91.80). The trader is issued 538 a margin call at the end of the firsttrading session equal to the $4,000 loss incurred. All system contractsare marked-to-market daily. The system requires that the trader has$10,000 ($4,000 loss plus $6,000 initial margin) in his custodialaccount by 9 a.m. the next day 539. The sample trader fails tosupplement his custodial account with the $4,000 and is therefore indefault.

The exchange notifies 540 the trader that his account is in default andis being liquidated. The system 11 enters a market order 542 to buy thetrader's short position back, but the market is lock limit up at 92.40and no offer is available. The exchange does everything possible toliquidate 544 the contract in a manner that is consistent withmitigating the trader's losses.

If at the end of the second trading session, the exchange could notliquidate the contract 546 in the open market or find a suitable hedgeto protect itself, the clearinghouse will assign 548 the contract to theopposite side (i.e. long) on a last-in-first-out basis at a price of92.40. The clearinghouse thus mutualizes the of risk among marketparticipants. While this can be used a last resort situation it iseffective to maintain orderly disposition of the defaulting subscriber'sassets. The clearinghouse will attempt all other liquidating processesbefore resorting to this assignment.

The clearinghouse having assigned 548 the position at 92.40 experiencesa loss of $6,000 on this trade. Offsetting this loss is the $6,000 ininitial margin coverage that the clearinghouse has in the custodyaccount of the trader. The clearinghouse has successfully transferredboth the position and liquidated the loss without experiencing a loss.In all default situations where the clearinghouse acts in this manner,it is certain to protect and maintain its financial integrity.

Referring to FIG. 19, the system 11 that runs the exchange 10 has alayered set of network and application-level security processes toprevent unauthorized access to the exchange 10 and to ensure dataintegrity and privacy. Specific security technologies can includefirewalls 410, intrusion detection 412, cryptography 414, and accesscontrol 416. Internet connectivity uses a secure socket layer, alongwith user IDs and passwords. The exchange 10 includes a secure databasecontaining financial information.

All data transmissions between a user's computer and the exchangeservers can be encrypted. Using standard web technology, the exchange 10includes a network of web servers 420 that distribute the workload ofcommunicating between the exchange 10 trading system and the users. Loadbalancing is used to keep all of the servers working at about the samelevel, providing uniform performance and response for all users. One ormore database servers deliver data to fill requests from each of the webservers and ensure that all data requests are handled uniformly, so asnot to enable a user or set of users any advantage over any other users.The exchange 10 can add more data servers, and apportion their use bycontract genus on a dynamic basis. This process will ensure thatincreased trading levels in one contract genus can be isolated so as notto affect trading in other contract genera.

The Exchange 10 can have a disaster recovery plan that is organized toaddress Maintenance and quality control, fault detection, faultisolation and recovery from a system problem. The system can usemultiple redundant installations of software components and hardwarecomponents. The system can also have redundant databases. The systemwill include redundant power supplies, Internet gateways, and otherinfrastructure components. The Exchange 10's systems can be implementedat geographically separate sites.

In one implementation standard PCS and web browsers are the onlytechnological requirements to access the exchange 10.

Other embodiments are within the scope of the appended claims.

1. A method of clearing transactions on an electronic exchangecomprises; performing a full settlement run after cessation of trading;automatically marking-to-market all open positions; and determiningmargin requirements.
 2. The method of claim 1 wherein determining marginrequirements determines that a position calls for a cash marginprotocol, the method further comprising: sending to subscribers orsubscriber depository or guaranteeing banks debits and/or credits; andupdating the resulting balances in, each subscriber's account.
 3. Themethod of claim 1 wherein determining margin requirements determinesthat a position calls for an asset based margin protocol, the methodfurther comprising: disseminating position information but no daily paysor collects will take place so long as sufficient assets are alreadyidentified.
 4. The method of claim 1 wherein marking to market furthercomprises: posting a position for a subscriber to a subscriber tradingaccount as soon as any portion of an order is filled.
 5. The method ofclaim 1 wherein marking to market further comprises: determining whetherthe subscriber has a position at the other side of the market that canresult in an offset of the position and the position at the other sideof the market.
 6. The method of claim 5 wherein marking to marketfurther comprises: liquidating the trade with any resulting credit ordebit identified as a realized gain or loss in the subscriber's tradingaccount.
 7. The method of claim 1 wherein determining marginrequirements further comprises: recording assets that are delivered tothe exchange for satisfying margin.
 8. The method of claim 1 whereinrecording assets further comprises: determining an equivalent assetvalue to reflect a capital charge applied to special classes of assets.9. The method of claim 1 wherein recording assets further comprises:maintaining an asset inventory for each trading account, and indicatingwhether assets in the trading account are limited to covering a singlecontract genus or a specific delivery commitment, or can be applied tomultiple products.
 10. The method of claim 1 further comprising:determining an initial margin for each contract species held in asubscriber's trading account.
 11. The method of claim 1 furthercomprising: determining a variation margin and applying the variationmargin to the subscriber's trading account.
 12. A computer programproduct residing on a computer readable medium for clearing transactionson an electronic exchange comprises instructions for causing a computerto; perform a full settlement run after cessation of trading;automatically mark-to-market all open positions; and determine marginrequirements for market participants.
 13. The computer program productof claim 12 wherein instructions to determine margin requirementscomprise instructions to causes a computer to determine that a positioncalls for a cash margin protocol.
 14. The computer program product ofclaim 12 wherein instructions to determine margin requirement furthercomprise instructions to: send messages that are debits and/or creditsto subscribers or subscriber depository or guaranteeing banks; andupdate a resulting balances in each subscriber's account.
 15. Thecomputer program product of claim 12 wherein instructions to determinemargin requirements further comprise instructions to: determines that aposition calls for an asset based margin protocol.
 16. The computerprogram product of claim 12 wherein instructions to determine marginrequirements further comprise instructions to: disseminating positioninformation but no daily pays or collects will take place so long assufficient assets are already identified.
 17. The computer programproduct of claim 12 wherein instructions to mark to market furthercomprise instructions to: post a position for a subscriber to asubscriber trading account as soon as any portion of an order is filled.18. The computer program product of claim 12 wherein instructions tomark to market further comprise instructions to: determine whether thesubscriber has a position at the other side of the market that canresult in an offset of the position and the position at the other sideof the market.
 19. The computer program product of claim 12 whereininstructions to mark to market further comprise instructions to:liquidate the trade with any resulting credit or debit identified as arealized gain or loss in the subscriber's trading account.
 20. A systemfor clearing transactions on an electronic exchange, comprises: acomputer system that is fed information regarding trades for traders onbehalf of subscribers, current prices for products traded on theexchange, information regarding margin available in a trading accountand margin requirements for a contract genus; a process that executes onthe compute system, comprising: a computer program product residing on acomputer readable medium for clearing transactions on the electronicexchange comprising instructions for causing the computer to: perform afull settlement run after cessation of trading; automaticallymark-to-market all open positions; and determine margin requirements formarket participants.